Call It A Housing Comeback: Headwinds Start Fading

The housing market roared back unexpectedly in May with a display of strength that economists have waited all year to see.

New-home sales hit a six-year high of 504,000 annualized units, surging 18.6% from April and handily beating forecasts for 441,000, the Commerce Department said Tuesday.

Prices also showed the first signs of a long-expected deceleration. The S&P/Case-Shiller index softened to a 10.8% yearly rise in April, down from 12.4%, a positive sign in a market that has wrestled with affordability.

The latest data follow Monday's National Association of Realtors report, which found that existing-home sales rose 4.9% to an annualized 4.89 million in May, marking the first stretch of back-to-back gains in a year.

U.S. stocks initially rallied on the strong housing data but reversed lower amid ongoing Mideast violence. Homebuilders held on to some of their gains. Lennar (NYSE:LEN), which reports earnings Thursday, rose 1%.

Inventory Building Up

Higher prices are among the headwinds suppressing demand for homes. Mortgage rates shot up a full point last summer after the Federal Reserve suggested that interest rates would soon shift higher.

At the same time, banks facing uncertain regulations have been more reluctant to extend credit, especially to would-be first-time buyers with low salaries and high student-loan debt.

While a combination of factors conspired against housing in 2013 and the first half of 2014, rising inventory will be key to jump-starting the market, said Stephanie Karol, an economist with IHS (NYSE:IHS) Global Insight.

The supply of new and existing homes has remained well below long-term averages, but the number of new homes for sale has risen by double digits on the year for five straight months.

"Housing is often a perfect storm of the exact right or wrong conditions," Karol said.

Zillow chief economist Stan Humphries says that the real estate site has seen a 12% increase in listings over the past year.

More inventory is a positive signal, he notes, because it shows that builders are increasingly willing to take a chance on ramping up new construction. It also reflects market psychology, as homeowners who previously sat on the sidelines while prices soared may now be induced to sell as prices come back to earth.

"We're still 5-6 innings into the game, seeing a real shift from a fast-paced recovery that created enormous price spikes to one which is a more normal recovery driven by increases in household formation and income growth," Humphries said. "That type of recovery is slower but more sustainable."

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